Galaxy Limited is in the process of finalization of its accounts for the year ended 31 st March, 2025 and needs your advice on the following issues…

(i) Since the understanding results in an enforceable agreement, the reimbursement of 10,00,000 (40% of 25,00,000) shall be recognized as a reimbursement right and provision will be recognized for the full amount of the liability of 25,00,000. The reimbursement right shall be treated as a separate asset and shall not be offset with the provision. In the Statement of Profit and Loss, the expense may be presented as 15,00,000 after offsetting the reimbursement right. (ii) As per AS 29, an obligation is a present obligation if, based on the evidence available, its existence at the balance sheet date is considered probable, i.e. More likely than not. Liability is a present obligation of the enterprise arising from the past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. In the given case, there are 70% chances that the penalty may not be levied. Accordingly, Galaxy Limited should not make the provision for liability. The matter is disclosed as a contingent liability unless the probability of any outflow is considered as remote. However, a provision should be made for the remaining 40% fees of the law firm amounting to 2,00,000 in the financial statements for 2024-25.